Not everyone is familiar with Schedule A on a 1040, especially healthy younger people with mortgage interest debt from owning a home. Schedule A is a deduction that reduces your total income before taxes are assessed against it.
The IRS gives you two choices when it comes to deductions. You can take a “Standard Deduction” which is a flat rate that everyone can elect and has no paperwork or reporting requirements. Or you can use a “long-form” and add up certain expenses in hopes that what you spent in those areas adds up to more than what the IRS allows you with the Standard Deduction. If it does, you can claim the higher amount, which again is subtracted from your total income before the taxes are applied, saving you more money. Schedule A allows deductions health care costs, including certain insurance premiums, home mortgage interest, property and other taxes, as well as a few other expenses.
The Trump tax code changes where sweeping and as part of the efforts to simplify things, the list of items allowed on Schedule A, as well as the amount of certain deductions, were limited. To compensate, the Standard Deduction amount was almost doubled. More deduction and less paperwork!
Because of these changes, many tax professionals told clients not to bother keeping records and to just take the Standard Deduction. But we say “not so fast!”
For those that have used Schedule A in the past, or been close to being able to use it, here’s a trick to think about.
The “double-up” as some call it is a tax play that many Americans can and should take advantage of. The concept could work for you well if you came close to the Standard Deduction amount of $12,000 for working-age single filers or $24,000 for couples. The idea is that you can prepay items in the current tax year that are not due until the next tax year in order to load a tax deduction onto this year’s return. Here’s an example: John, who is single, has no medical expenses that qualify, paid $5,000 in state income tax in the previous year, paid $3,500 mortgage interest and gives $2,500 to his church annually. He also paid $800 in excise tax on this car. His Schedule A deductions add up to $11,800 and his Standard Deduction is $12,000 so he gains $200 of deduction by not using the long-form and simply saying “I’ll take what you automatically give me, Uncle Sam!” After learning of the double up by reading this blog, he calls the deacon of his church and says “I’m writing a check for $2,500 now for my 2020 tithing. It’s not additional gifting. I won’t be putting an envelope in the collection plate in 2020, I’m doing it all now! Then, when he files his taxes in a few weeks (yes, sorry to say, we are that close again), he adds up $5,000, $3,500 and $800 as he did last year, but then adds $5,000 for charity. Now the deduction is $14,200, well above the Standard Deduction, and he enjoys the larger refund, which by the way, is substantially more than the interest he would have earned by keeping the $2,500 in the bank and doling it out at church over the next year.
Next year, he would then only have a $4,800 state income tax deduction due to the lower total income last year, $800 in excise tax and a little less than $3,500 in mortgage interest. With $9,100 in Schedule A deduction, the Standard Deduction will be a better option for him this time around. He wins again! By lumping flexible Schedule A expenses for two years into one year and using Schedule A every other year, millions of Americans can take home additional refund dollars! Just go do the math or search out a tax planner to see if this plan can work for you.